What can sharks and toasters teach us about investing?

Risk can be surprising

With around 5 or 6 unprovoked deaths a year worldwide, the likelihood of dying from a shark attack is really, really low. But sharks have a fearsome reputation, and the perceived risk is probably much higher than the actual risk.

When it comes to investing, make sure you understand the actual risks to you. For example, you may worry about the value of your DC Plan savings falling. This is investment risk and it’s what most of us think of when we think about risk.

But should you fear it? The flip side of investment risk is that it’s linked to potential rewards too – the greater the risk, typically the higher the potential for growth.

So, rather than avoiding it, you’ll probably need to take on some investment risk if you want the potential to grow the value of your savings over the long term – particularly if you’re not planning to take them any time soon.

If you’re swimming in known, shark-infested waters, at dusk then the risk of a shark attack is a lot higher than a toaster coming to get you.

The same could be said for investing – the risks to watch out for change depending on your circumstances. For example, if you’ve got a long way to go before you retire – investment risk is less of a worry compared to the risk that your savings don’t keep pace with the rising cost of living (inflation) over time. If prices go up faster than your savings, then the real value of your money – your spending power – drops.

Alternatively, if you’re close to retiring, there’s a risk if your savings aren’t invested in funds that suit how you’re planning to take them. For example, if you wanted to buy an income for life (an annuity) – there are funds that invest in assets, like Government bonds, that typically move in value in the same way as the price of buying an annuity. This protects your money by keeping the relative cost of your annuity steady.